December 12, 2023 – The Last Time the Fed Meets

Economic Commentary

Today is the last meeting of the Federal Reserve’s Open Market Committee. Well, for the year anyway. Though technically, the Fed can call an emergency session at any time if a crisis takes place. For example, the “Black Monday” stock market crash of October of 1987. There were emergency rate cuts in response to the Financial Crisis of 2008 and more recently during the pandemic. We are expecting no such emergencies to happen for the remainder of the year, but emergencies are not usually anticipated ahead of time.

Thankfully, most market analysts are expecting no action on rates by the Fed at this meeting. If this additional month of pause comes to fruition, that means we will have had a pause from hikes for a full six months. Which brings us to the definition of the phrase “higher for longer.” Because inflation was acting stubbornly, the Fed declared that we could expect rates to stay higher for longer. We wonder just how long that is. Could the pause last for a year before the Fed cuts rates? Or could the first rate cut come before or after that time?

We must watch the data on inflation and economic growth carefully to answer this question. Friday, we received data showing the job market continues to be strong. We had some good inflation news last month and the Consumer Price Index for November is due to be released today. You can be sure the Fed will take note of this number during their meeting today. We should note that the Fed has not ruled out at least one more rate increase if the numbers start moving the wrong way. If we get another month of good inflation news, that should be enough to keep the Fed from their itchy trigger finger as they wait things out.

Weekly Interest Rate Overview

The Markets. According to the Freddie Mac Mortgage Rate Survey the good news regarding interest rates is continuing. Released one day before the employment report, rates continued to ease to their lowest levels in months. As indicated in the commentary, the jobs report was strong, but close to forecasts. For the week ending December 7, 30-year rates fell to 7.03% from 7.22% the week before. In addition, 15-year loans decreased to 6.29%. A year ago, 30-year fixed rates averaged 6.33%, more than 0.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage averaged near 7 percent this week, down from nearly 7.80 percent just six weeks ago. When rates began to rapidly drop, purchase applications rebounded initially, but this improvement in demand diminished in the last week. Although these lower rates remain a welcome relief, it is clear they will have to further drop to more consistently reinvigorate demand.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Economic growth remains likely to decelerate and ultimately result in a mild recession in 2024, followed by a return to growth in 2025, according to the November 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. While the combination of ongoing employment gains and decelerating inflation has increased the likelihood of a soft landing, the ESR group contends that, between a likely slowdown in consumption growth stemming from an imbalance between spending and incomes and the rising real federal funds rate weighing on consumer and business activity, a downturn remains the most likely outcome. With mortgage rates having previously neared the 8 percent mark, the ESR Group expects existing home sales to decline further in the near term but bottom out in early 2024. Regardless of whether the economy manages a soft landing or enters a mild recession, the ESR Group forecasts mortgage rates in 2024 to retreat from their recent highs and average 6.8 percent by the fourth quarter. As such, the ESR group expects home sales to begin to increase modestly over 2024 but to remain constrained by the likely persistence of the so-called “lock-in effect” and the low supply of homes for sale. New home sales and starts, which have remained comparatively resilient over the past year, are expected to remain so in 2024. “The economy is now slowing from the otherwise robust first estimate of third quarter growth,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The slowdown in employment gains has continued, and stress is growing on consumers’ ability to sustain their high levels of spending – unsurprising results that we attribute to the often-lagged economic effect of monetary policy tightening. At the same time, housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity. While many current owners with low mortgage rates will likely continue to be discouraged from listing their homes, we expect mortgage rates to trend modestly downward in 2024, which should help kickstart a gradual recovery in home sales into 2025.” Source: Fannie Mae

As U.S. housing markets across the nation are cooling down and continue to recover from record-low inventory, home prices in the most exclusive ZIP codes have increased, according to a new Point2 study. Amid dwindling housing supply, homes are still flying off the market in nearly half of the 100 most exclusive U.S. zip codes analyzed. And while properties on the affordable side sold fast, the report found that competition in the ultra-luxury markets is in a league of its own. Point2’s sister division, PropertyShark, has released its annual ranking of the 100 most expensive ZIP codes in the U.S. The report highlighted the record-breaking price tags in some of the country’s ultra-exclusive zip codes against the national backdrop of declining median sale prices. The report showed that in 46 of the country’s 100 priciest zip codes, properties lasted less than a month on the market and in 8 high-end areas, homes were sold in 10 days or less. In addition, compared to last year, properties sold faster in half of the country’s most expensive ZIP codes and in 23 of the country’s most expensive ZIP codes, more than half of the properties were sold above asking price. “The run-of-the-mill homebuyer might not line up for the uber-luxury homes, but the housing market in the most exclusive ZIP codes is far from stagnant,” said Doug Ressler, Manager of Business Intelligence at Yardi Matrix. “Despite the uncertainty, stubborn inflation, interest rate gyrations, and continual struggles with inventory and supply chains worldwide, local and regional conditions have sustained the luxury property market. In fact, things are better than many had expected despite supply and demand being out of balance in many places.” Source: MReport

A recent Redfin survey finds that nearly 80% of respondents support policies that promote building more housing. Although the report finds that the majority of respondents are pro-building, just one-third (32%) of respondents would feel positive about an apartment community being built in their neighborhood, while 20% would feel negative and nearly half (48%) would feel neutral. When broken down by homeowners versus renters, 74% of owners support policies that promote building more housing, compared with 80% of renters. One-quarter of owners would feel positive about a new apartment community being built in their neighborhood, which is just about on par with 28% of renters. Two in five owners would feel negative about a new apartment community being built in their neighborhood, and a smaller percentage (35%) of owners would feel neutral. That’s compared with about one-quarter (24%) of renters feeling negative about the prospect of a new apartment community nearby, and nearly half (49%) who would feel neutral. The U.S. had an estimated housing shortfall of 3.8 million units as of 2021, and both buying and renting a home is more expensive in 2023 than it’s ever been. Prices continue to rise due to elevated mortgage rates and a shortage of homes for sale. Building more housing would narrow the gap between supply and demand and help make housing more affordable. Policies that promote building include loosening zoning restrictions, allowing accessory dwelling units (ADUs) and enacting tax incentives that would encourage developers to build. “Personal preferences for things like a quiet neighborhood or old-fashioned charm are often at odds with building new housing,” said Redfin Chief Economist Daryl Fairweather. “Even though so many Americans believe in building new dense housing in theory, that ideology isn’t strong enough to outweigh their own desires–especially when they don’t stand to directly benefit from the building. That’s why it’s so difficult to overcome community opposition to dense new housing, even during a time when so many Americans believe in the Yes In My Backyard (YIMBY) movement.” Source: MBA